2. 1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso, Trenholm KIMMEL

3. 2 Chapter 8 Reporting and Analysing Receivables After studying Chapter 8, you should be able to: 1.Identify the different types of receivables. 2.Explain how accounts receivable are recognized in the accounts. 3.Describe the method used to account for bad debts. 4.Explain how notes receivable are recognized and valued in the accounts. 5.Describe the entries to record the disposition of notes receivable.

4. 3 Chapter 8 Reporting and Analysing Receivables After studying Chapter 8, you should be able to: 6.Explain the statement presentation of receivables. 7.Describe the principles of sound accounts receivable management. 8.Identify ratios used to analyse a company's receivables. 9.Describe methods used to accelerate the receipt of cash from receivables.

5. 4 +Amounts due from individuals and companies-expected to be collected in cash +Frequently classified as +Accounts receivable +Notes receivable +Other receivables Types of Receivables

6. 5 Accounts Receivable +Amounts owed by customers on account +From sale of goods/services (trade) +Normally expected to be collected within 30 days +Most significant type of claim held by company

7. 6 Notes Receivable +Claims for which formal instruments of credit are issued as evidence of debt Illustration 8-9

8. 7 Other Receivables +Nontrade including +Interest receivable +Loans to company officers +Advances to employees +Refundable income taxes +Recoverable sales taxes

9. 8 Accounts Receivable +Recorded when service is provided or at point of sale of merchandise on account Accounts Receivable 100 Sales 100

10. 9 Bad Debts Expense +Expense to record estimated uncollectible receivables

11. 10 +The Direct Write-off Method +The Allowance Method Accounting for Uncollectible Accounts

12. 11 GAAP Bad debt expense shows only actual losses. Accounts receivable reported at gross amount. Direct Write-Off Method +Bad debt losses are not estimated +Accounts are written off when determined uncollectible Bad Debts Expense 200 Accounts Receivable-M. E. Doran 200

13. 12 Allowance Method +Uncollectible accounts receivable estimated and matched against sales in same accounting period in which sales occur +Uncollectible accounts receivable may be estimated using +Percentage of sales (not illustrated) +Percentage of accounts receivable +Percentage of total accounts receivable +Aging accounts receivable

14. 13 Percentage of Receivables + Management establishes a percentage relationship between amount of receivables and expected losses from uncollectible accounts

15. 14 Aging of Accounts Receivable + Analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it is to be paid

16. 15 Recording Estimated Uncollectibles Hampton Furniture has credit sales of $1,200,000, of which $200,000 remains uncollected. The credit manager estimates $12,000 will prove uncollectible Bad Debts Expense 12,000 Allowance for Doubtful Accounts 12,000

17. 16 Net Realizable Value +Net amount expected to be collected in cash +Excludes amounts the company estimates it will not collect Keeps receivables from being overstated on the balance sheet

18. HAMPTON FURNITURE Balance Sheet (partial) Current assets Cash $ 14,800 Accounts receivable$200,000 Less: Allowance for doubtful accounts 12,000 188,000 Net Realizable Value

19. 18 Write-off of an Uncollectible Account The vice president of finance authorizes a write-off of $500 owed by R.A.Ware Allowance for Doubtful Accounts 500 Accounts Receivable-Ware500 Accounts Receivable Allowance for Doubtful Accounts Jan 1 Bal 200,000Mar 1 500 Mar 1 Bal 199,500 Jan 1 Bal 12,000Mar 1 500 Mar 1 Bal 11,500

20. Current assets Cash $ 14,800 Accounts receivable$200,000 Less: Allowance for doubtful accounts 12,000 188,000 Current assets Cash $ 14,800 Accounts receivable$199,500 Less: Allowance for doubtful accounts 11,500 188,000 Before Write-off After Write-off Net Realizable Value Illustration 8-6

21. 20 Recovery of an Uncollectible Account Accounts Receivable-Ware 500 Allowance for Doubtful Accounts 500 Cash 500 Accounts Receivable 500 Record in 2 separate entries

22. 21 Notes Receivable +Result from sale of goods and services (trade) +Stronger legal claim to assets than accounts receivable. Written promise (promissory note) to repay +Negotiable instruments and may be transferred to another party by endorsement

23. 22 Notes Receivable +Credit instrument normally requires +Payment of interest +Extends for time periods of 60-90 days or longer

24. 23 Notes Receivable +Often accepted from customers who need to extend payment of an account receivable +Often required from high risk customers

25. 24 Parties in a Note Is the party in a promissory note who is making the promise to pay Payee Is the party to whom payment of a promissory note is to be made Maker

26. Formula for Interest Illustration 8-10

27. 26 Notes Receivable +Recorded at face value +Reported at net realizable value (less allowance for doubtful notes) +Honoured when paid in full at maturity +Dishonoured when not paid in full at maturity

28. 27 +Listed before accounts receivable because notes are more easily converted to cash +Bad debts expense is reported as a selling expense in the statement of earnings +Interest revenue is shown separately in the nonoperating section of the statement of earnings) Reporting Notes Receivable

29. 28 Managing Receivables +Determine to whom to extend credit +Establish a payment period +Monitor collections +Evaluate receivables balance +Accelerate cash receipts from receivables when necessary

30. 29 Credit Risk Ratio +Measure of the risk that a company’s customers may not pay their accounts Credit risk ratio= Allowance for doubtful accounts Accounts receivable

31. 30 Concentration of Credit Risk +Threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company

32. 31 Evaluating the Receivables Balance +Liquidity is measured by how quickly certain assets can be converted into cash +Receivables turnover ratio +Average collection period

33. 32 Is a measure of the liquidity of receivables Receivables Turnover Receivables turnover = Net credit sales Average net receivables

34. 33 Is the average amount of time that a receivable is outstanding Average Collection Period Average collection period = 365 days Receivables turnover

35. 34 Accelerating Cash Receipts +Waiting for the normal collection process costs money +A bird in the hand is worth two in the bush

36. 35 Accelerating Cash Receipts +Loans secured by receivables +Sale of receivables +More sales if financing provided to customers +Receivables may be the only reasonable source of cash +Billing and collection are often time- consuming and costly +Use of credit cards

37. 36 Bank Credit Card +Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailer +Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller's bank balance

38. 37 Nonbank Credit Cards +Sales using nonbank cards are reported as credit sales, not cash sales +Conversion into cash does not occur until company remits amount to seller

39. 38 Decision Checkpoints +Is the amount of past due accounts increasing? Which accounts require management’s attention? +Is the company’s credit risk increasing? +Does the company have significant concentrations of credit risk? +Are collections being made in a timely fashion? + Credit risk ratio + Receivables turnover ratio + Average collection period

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